What's in the financial reform compromise reached by House, Senate

House Financial Services Committee Chairman Barney Frank (D-MA) (c.) talks with a group including Ranking Member Spencer Bachus (R-AL) (l.) during a recess from a committee conference on Wall Street reform to hammer out sweeping changes in financial regulation legislation on Capitol Hill in Washington Thursday.

Over a 20-hour negotiating session ending just past dawn on Friday, House and Senate conferees thrashed out a final version of the most significant new financial reforms since the Depression, preparing legislation for a final vote in Congress next week.

The vast Wall Street regulation bill – a top priority of the Obama administration – launches a powerful, independent consumer-protection bureau, sets up an early-warning system for financial groups deemed too big to fail, revamps oversight of credit agencies, mandates lower fees on debit-card charges, and directs much of the $600 trillion over-the-counter derivatives trade through clearinghouses and exchanges.

The 2,000-page bill was voted out of conference on a party-line vote, 27 to 16, and now heads back to the House and Senate for final passage. Unexpectedly, the draft legislation didn’t reduce to the least common denominator or cave to powerful industry lobbying during negotiations.

Final negotiations hinged on regulation of the derivatives market – one of the most profitable and most unregulated areas of the banking business and an epicenter of the market meltdown. Sen. Blanche Lincoln (D) of Arkansas, who chairs the Senate Agriculture, Nutrition, and Forestry Committee and is facing a tough reelection bid, included strict rules in the Senate bill requiring the largest banks to spin off their derivatives operations into separate entities. “We target the largest, the riskiest players and expect more of them, as we should,” she said during Thursday night’s negotiations. “The whole point of our bill is to increase stability ... and get banks back to being banks.”

In the end, however, Senator Lincoln accepted less restrictive language in a compromise proposal offered by Rep. Collin Peterson (D) of Minnesota, who chairs the House Agriculture Committee. The proposals would allow banks to continue to use swaps to hedge the bank’s own risk on interest rates or foreign exchange, but they would still require banks to spin off riskier commodities and credit-default swaps.

The issue drove a wedge through Democratic ranks, with the New York delegation and moderate New Democrats, heavily represented on the House Financial Services panel, often holding out to protect the banking industry. Supporters on Capitol Hill make the case that banks could easily take their trades to overseas markets if US regulations were deemed too restrictive.

Union activists had urged lawmakers to preserve the Senate’s derivatives language, with no changes. “Let me be clear. Any provisions or alternative language being offered are a gift to Wall Street,” said AFL-CIO president Richard Trumka in a statement Thursday. “Financial regulatory reform without this strong derivatives language maintains the status quo where Wall Street gets rich on the back of working families. We have to get it right or we set our nation up for another financial crisis.”

In another flash point, the conference relaxed the so-called “Volcker rule,” which would have barred banks from making speculative investments for their own account, rather than in the interest of customers. The fix worked out in conference allows banks ongoing investments not more than 3 percent of their tangible equity in private-equity funds or hedge funds. The change could cost Senator Dodd two Democratic votes – Sens. Russ Feingold of Wisconsin and Maria Cantwell of Washington – that he will need to find in GOP ranks to get to 60 votes in the Senate. [Editor's note: The original article wrongly identified Feingold as a senator from Minnesota.]

The banking lobby and some members were caught short by the proposal of Rep. Barney Frank (D) of Massachusetts to fund the $22 billion, 10-year cost of the bill by assessing taxes on the largest financial organizations, with riskier entities paying more. “I’m not surprised to see another tax to finance this [Democratic] spending spree,” says Rep. Jeb Hensarling (R) of Texas, the top Republican on the House Financial Institutions and Consumer Credit subcommittee. “Those billions we all know are dollars that could have been used to fund lending, to grow the economy,” added Rep. Ed Royce (R) of California.